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mote. e the price ram ring ding have' past don't That e im- mities lping essed i lifee just ;e "aa just. Lt we Zings aged Iresi- inate ated. r ~ Pair- o get look r not ke or lot of have en. record rch on p1e to EiEW. ave. 31 Excerpt from Social and Economic Issues Confronting,the'Pobacco Industry in the Seventies-- A. Frank Bordeau, Jr., and Russell H. Brannon, editors Chapter 16 IMPACT OF ELIMINATING THE TOBACCO PRICE-SUPPORT SUPPLY-CONTROL PROGRAM _.., Garnert L. Bradford and James F. Thompson * Introduction Since the inception of the 193$' Agricultural Adjustment Act, tobacco frequently has been singled out for favorable legislative treatment.' Now, in light of recent politicat winds, especially those centering around' the tobacco-health controversy, it appears that these "good times" may be nearing an end. Is it possible that the tide of public, thus legislative, opinion is feeding on anti-tobacco sentiment to the point that the price-support program is in danger of being elimi- nated? We do not propose to speculate on the politics of this possi'- bility. The fact that a possibility exists, however, makes this topic one that should be analyzed-not in its political context, but as fully as possible in the context of its expected economic impacts. Indeed, the 1970's may be a period when tobacco is singled out for unfavorable legislative treatment. Various aspects of this topic have been considered by economic researchers during the past decade.= Still it has not been analyzed as a single unit, certainly not comprehensively. It is our intent to assess the economic effects of terminating the program i.e., returning to a free market. This preliminary assessment will be limited to the two major types of tobacco, burley and flue-cured. Our analysis is more •Associate Professor of Agricultural Economics, University of Kentucky, and Piofessor of Economics, Murray State University, respectively.

conceptual than empirical im nature and we deal primarily with the agricultural sector, viz., tobacco prices and production, farmland values, and certain facets of farm structure and income. The empiricism is based largely on results from other studies. Thus, the paper is "new" to the extent that it provides a synthesis of the possible effects of this potential radical change in agricultural policy. Long-Run Price and Output Changes Estimation of the effects of any proposed policy change requires some knowledge of the free market demand and supply curves upon which the proposed change would be superimposed. The domestic market for non-processed tobacco has not been free to determine prices and quantities since the 1930's. Thus, the market has generated little in the way of data useful as a basis for supply and demand estimates. Our only recourse in this situation was to reason as best we could on the basis of the bits of data which were available. Factors Affecting Supply. On the supply side, which surprisingly seems to be the easiest one, the fact that an acreage allotment has been necessary for profitable production has given rise to a market in "licenses to produce tobacco." These licenses have taken~ on value commensurate with the extent to which actual prices exceeded what free market price levels would have been, subject to the uncertainty ' Sec J. C. Williamson, Jr. and W. D. Toussaint, "Parity and Support Prices for Flue-Cure& Tobacco", Journal of'Farm Economics, 43: 1, 1961, pp. 13-26, for details on the legislative history pertaining to tobacco price-support legislation. ' Major contributions in this area are: L. M. Hartman and G. S. Tolley, Effects of Federal Acreage Controls on Costs and Techniques of Producing Flue-Cured Tobacco, Technical Bulletin No. 146, North Carolina Agricultural~ Experiment Station, Raleigh; F. H. Maier, et aL, The Sale Value of Flue-Cured' Tobacco Allotment, Tcchnical Bulletin No. 148, Southeast Land Tenure Research Commit- tee, Virginia Polytechnic Institute, Blacksburg, Virginia, 1969; J. A. Seagraves, "Capitalized Values of Tobacco Allotments and the Rate of Return to Allotment Owners" American Journal of Agricultural Economics, 51:2, 1969, pp. 320-335;, V. N. Grise, et al:, An Analysis of the Effect of Selected Economic Variables on the Optimum Location of Burley Tobacco Production Within the Burley Belt, Research Report 8, Department of Agricultural Economics, University of Ken- tucky; D. M. Shuffett and Josiah Hoskins, "Capitalization of Burley Tobacco Allotment Rights into Farmland Values", American Journal of Agricultural Economics, 51(2), 1969, pp. 471-474, and; R. Charles Brooks and J. C. William- son Jr., Flue•Cured Tobacco Programs, 1933-1958, A. E. Information Series No. 66, Department of Agricultural Economics, N.C. State University. ~.

quires upon mestic prices ittle in s. Our n the ces for *26, IOI ion. jects of e-Cured erimenU obacco ommit- graves, otment 20.335; bles on !ey Belt: of Ken- Tobacco icultural Wiliiam- :ries No. 33' attached to the continued value of such licenses.3 This value, in general, has been capitalized into the value of farmland. The market price of tobacco minus the per pound cost of the license provides an estimate of the short-run supply price of tobacco given current conditions, viz., current technology, current prices of variable inputs, current quantities of fixed inputs, and current levels of yield and price uncertainty. In recent years allotments have been at least partially separated from land and'made negotiable with the result that their values are now somewhat explicit.4 Attempts have been made in both the burley and flue-cured areas to estimate the value of an~ acre of allotment by using regression models to relate the value of a farm to the size of the acreage allotment and other quantifiable factors which clearly affect land values.s Certain other factors, mainly site value, were held! approxi- mately constant by the method of choosing the farms to be included in the analysis. Also, since flue-cured allotments can be leased, there is now a separate market for them. The resulting lease rates are another indication of the value of the licenses. Still another indication is afforded by subtracting production costs from the market value of production, the difference being an "abnormal profit" or the maximum amount one could profitably pay for a license. Either the lease rate or the profit per acre can be capitalize& and compared with~ allotment values estimated! by regression methods. Discount rates needed to equate the two are quite high. Perhaps farmers •who buy land with~ allotment attached use a relatively high discount rate, in anticipation that the program could be discontinued with result- ing capital losses. By means of these high discount rates, farmers are in effect carrying,their own insurance against program discontinuance. In the flue-cured production areas, lease rates average around 15 3Scagraves rendered a penetrating analysis of how capitalized value have changed over time and the manner in which such changes are related to the uncertainty factor. This is discussed in more detail by Bordeaux and Hourigan in Chapter 15 of this book. See Seagraves, op.cit„pp. 320-335. 4 In the case of burley prior to 1971 it was necessary to lease an entire farm to obtain the off-site use of the allotment. However, a common practicc was to lease small or unproductive farms, use the burley allotment and leave the remainder of the farm idle. In these cases, the lease rate for the entire farm was essentially a rate for the allotment. Another practice was to cash rent the allotment in place;;in this case the rental rate included the land and sometimes barn space and sticks. sSee Shuffett and Hoskins, op.cit., and Maier, et al:, op.cit.

34 cents per pound of tobacco and in the burley areas around 20 cents.6 Since average market prices for both tobaccos are in the range of 70 to 75 cents per pound, this suggests that the short-run supply prices for current quantities of both are in the neighborhood of 50 to 55 cents per pound. This price, coupled with aggregate controlled production, is a point on the short-run supply curve for tobacco-the particular curve being the one resulting from current levels of technology, factor supply relationships, and uncertainty. Diminishing returns to fixed inputs renders this curve less elastic than the corresponding long-run supply curve with all inputs variable. The "most fixed" inputs are barn space, some equipment, and resident labor. The short-run supply price will be lower than the long-run supply price when output levels are low and there is excess capacity in the fixed inputs, especially since the opportunity costs of these inputs are probably quite low. The short-run supply price will be above the long-run price at high output levels, when the fixed inputs are being used intensively and additional output is more difficult to attain. Casual observation indicates that there is little in the way of excess capacity with the exception of~some resident labor on farms with small allot- ments. Thus, a price in the 50 to 55 cent range is probably not far below the long-run supply price. It might, in fact, be taken as a lower limit for the long-run, free market supply price for the current levels of output. Returning to a free market would probably increase the degree of price uncertainty and further increase the free market supply price since farmers will require some payment for bearing this additional uncertainty. Moreover, it appears that the long-run supply curves for both flue-cured 'and burley are very elastic. Economies or diseconomies to size of operation~do nof' appear to be significant. Nonlabor inputs are in abundant supply or can be made so at little or no increase in cost. There seems to be no reason to believe that contraction of output would result in reduced nonlabor costs or that long-run expansion of output would lead to significant increases. Thus, as far as these inputs 'There is considerable variation in the lease rate among counties for flue-cured types as shown by' Dale M. Hoover in Lease and'Transfer of Flire•Ctrred' Tobacco Marketing Quotas Anzong Farmers for the 1966 arrd 1967 Crop Year: A Prelimi- nary Report, Economic Information Report No. 6, Department' of' Economics, N.C. State University. The analysis by Shuffett and Hoskins„ "Capitalization of Burley Tobacco Allotment Rights into Pannland Values," indicates that burley lease rates wlll also vary a great deal. i :Y'. ~. .. . ~ 1 . 1 ~. ~ _. _ . . . . .. ~ 4*4•+y.1 . . ':y. .

35 cents.6 0 of 70 to rices for 55 cents ation, is ar curve r supply 0 inputs supply n space, 0 supply in the puts are ove the 0 e being . Casual apacity il allot- not far a lower evels of degree y price ditional 0 both mies to s are in cost. output sion of inputs ue-cured Tobacco Prelrini= nomics, 0 tion of burlev 1 2 0 4 a are concerned, the long•run supply curves could probably be taken as perfectly elastic. It appears, however, that the labor supply curve to the tobacco industry has a positive slope, and since labor is the most important component of total cost this would impart a positive slope to the long-run supply function. Yet, most of the tobacco areas are charac- terized by continuing migration from farms and the wage increases necessary to retaim enough labor to make sizeable expansions in tobacco production would probably be moderate. In summary, the long-run supply functions for both, burley and flue-cured tobacco could be expected to fall either within the range of 50 to 55 cents per pound or slightly higher over a wide range of produc- tion levels.' Thus, the free market price would also fall in or close to this range with the quantity of production being determined by the location of the demand curve. Factors Affecting Demand. There is no auxiliary market yielding much useful data on the demand for tcbacco. We do know, however, what the market has been taking within reeent price ranges, and that the elasticities of both domestic and foreign demand are almost certain- ly quite low. It also seems likely that lower prices should be associated with a rather low domestic demand elasticity. However. the foreign demand elasticity would probably be considerably higher at prices near those at which comparable tobacco from other countries moves in world trade. This is especially true in the case of flue-cured. Other exporting countries seemingly can come closer to duplicating the Amer- ican flue-cured' product tham in the case of burley. Besides, the world market for flue-cured is much larger than that for burley. In other words, even if the export demand elasticity for burley is considerably higher at low prices than at current prices, this elasticity would apply to a much smaller fraction of the market than in the case of flue-cured and the elasticity of total demand for burley could be expected to remain quite low. Tariffs levied on tobacco by importing countries also ten& to reduce the elasticities. Thus, for burley, one might expect that the market would absorb. an output not substantially larger than at present at a price in the 50 to 55 cent range. The quantity of flue-cured could be expected to rise significantly at these prices, but it is not possible to say by how much. °This range implicitly assumes no appreciable changes in production technology and is in terms of real (constant) dollars. It is fairly close to an estimate made by Ilartman and Tolley for nue-curedleaf alone. See Hartman and Tolley, op:cil. 4

36 K Over the years a number of technological changes in tobacco utilization have substantially reduced the tobacco requiredi for a given output of cigarettes. Perhaps the development an& use of these new techniques would not have been profitable had tobacco been priced lower. If this is the case, the long-run demand for tobacco may actually be quite elastic. Prices in the 50 to 55 cent range would make future developments of the same kind less profitable and might result in the market taking substantially larger quantities thamat current prices. Factors Affecting Supply. Some observers contend that lack of excess barn curing space and shortages of seasonal laborers should significantly suppress production increases, at least during the first year or two following program termination. This hypothesis appears reason- able for both flue-cured and burley types, but especially so for burley where the seasonal labor pool may be extremely limited and construc- tion costs of new curing,space are high.8 Obviously, there would be considerable uncertainty among producers about strategies which might be followed in disposing of leaf owned by grower cooperatives (CCC loan stocks). In general, such be supported with evidence. On the other hand, a forecast which is too general is not useful as a basis for policy. In this section we opt for something,of a "middle ground". The analysis is necessarily abstract. but some numbers are attached for illustrative (and preliminary predictive) purposes. Certainly if a reason- ably accurate forecast of-the short-to-intermediate-run price pattern could be made, problems in analyzing expected changes in resource adjustments and income distribution would be eased considerably. in the elasticities. In our opinion, any very specific forecast could not Price variability will be influenced by both supply and demand phenomena, viz., changes in~ supply and deman& magnitudes as well as Price and Output Changes in Initial Years Forecasts of free market prices for the first three to five years following program elimination are obviously hazardous in the extreme. 'Conventional-type curing facilities require a new investment of around S.60 per pound for burley and S.25 per pound for flue-cured. Many flue producers are now adding, bulk curing barns which require an initial investment of around S.50 per pound. Such nonconventionali facilities for burley are stiU in the experimental stages of development. L0 9e+:,:.,;k; • -.. .- f

bacco given new jpriced ctually future in the S. ack of should st year reason- Iburley rtstruc- iamong of leaf I, such 15.60 per lare now 50 per ~imental stocks would act as a supply-increasing, thus price•depressing factor; however, they may be disposed of in such a manner as to dampen price variability and thus tend to eliminate producers'price uncertainty. It is doubtful, though6 that producers would be able to anticipate any particular loan disposition policy, especially during the first year or two following program~ termination. Thus, loan stocks of appreciable size should serve to create price uncertainty, and consequently, decrease elasticity of supply by producers.9 Whatever the source, product price uncertainty should persuade many producers to at least defer commitments for increasing their labor resources devoted to tobacco production. It is possible, also, that the supply of seasonal labor, so necessary with present technology to harvest burley and flue-cured, is quite inelastic.' ° We do not know of any studies which have teste& this hypothesis. But, lacking any other plausible explanation, for the time being, we accept it as the most credible. In short, on the supply side, there are three major factors to be considered!: lack of excess curing space, uncertainty about disposition of government loan stocks, and an inelastic supply of seasonal labor. When combined these factors should give rise to a quite inelastic short- to-intermediate-run supply function. Moreover, these same factors should suppress any outward shifts in this supply function. Factors Affecting Demarrd. We have already discussed demand elasticity (both domestic and foreign~ for both burley and flue types). Year-to-year demand shou:d be equally as inelastic and relatively stable, if not more so, because of the unlikely possibility of sudden sharp consumer-preference changes or the sudden emergence of "good" tobacco substitutes. Demand elasticity for cigarettes is quite low and 9Currently, government loan stocks of both burley and ituecured types constitute relatively large proportions of total stocks-around 25 per cent of total burley stocks and 26 per cent of total flue-cured stocks. 10Burley producers currently are paying at least $2 per hour for seasonal harvesting labor, flue-cured farmers around S1..30 per hour. Both groups, in general, contend that any significant increase in tlris rate would attract„perhaps, only negligible increases in the offerings of labor services. The key phrase here seems to be "significant increase". Obviously, if the increase were large enough the supply function may exhibit some more elasticity, but this could be quite high-say in the range of $3 to $5 per hour, rates that manufacturing laborers in these geographic areas currently receive.

f K 38 every relevant consideration indicates that the elasticity for unpro- cessed tobacco is even lower-especially in the short run.' ~ " Jt is doubtful that low demand elasticity would contribute to year-to-year tobacco price variability nearly so much as year-to-year variability in the quality of domestic tobacco crops. We cannot docu- ment that sharp variability occurs, but the surface evidence certainly is not inconsistent with such a cont'ention.t 2 The deman& for burley (and ,most certainly for flue-cured types) is in actuality not a demand for a homogeneous product. Domestic and foreign buyers differ in their raww product needs, by tobacco grades, even though there may be a rather large degree of grade and type substitution.13 Thus, in any particular marketing season there appears to be varying degrees of how weil'that season's production fits such needs. For example, a particular crop may (as a whole) be described by buying firms as being, very desirable in some ways an& not so desirable in other ways. In any event, if the totality of a givem crop is deemed to be generally undesirable, companies appear to adopt the. strategy of deferring buying until another season and/or purchasing substitute materials including govern- ment loam stocks. The net result is the same as am intermittent shifting of the relatively inelastic demand curve. Price Patterns. Production and price could move in a modified cobweb pattern. We will assume, for simplicity, that demand sh-ifts are : minimal' or nil an& government loan stocks act as an overall price- depressing factor rather than as a supply-shifting factor. The resultant modified cobweb patrtern which contains short-run supply and deman& curves of the inelastic nature previously discussed (Figure 1). Production and price in the last year of price supports is indicated "The fact that tobacco accounts for a very small percentage of the costs of a package of cigarettes is very important. For a discussion of demand elasticities see Herbert L. Lyon and Julian L. Simon, "Price Elasticity of the Demand of Cigarettes in the United States", American Journal of Agricultural Economics. Vol. 50: 4, 1968, pp. 888-895. _ . , r. '"For example, the 1970 burley crop sold higher than most economists had expected-given the large amounts already in total supply and especially in loan stocks. One explanation for this good market was simply that' the crop was "usable" by tobacco companies. P "Thcse rules are dictated by differing blends in cigarettes and other tobacco products. Public observers, in general„have only limited knowledge about these btend6. 11 b) h) o1 to OI pr a fo Pt p1 P3 Q2

39 by OQo and OPo, respectively. Subsequent production decisions are hypothesized to adhere to a classic cobweb pattern, with the exception of year tr when the barn space and labor constraints are hypothesize& to dampen the cobweb response and limit production to, say OQ, -thus, price would be OPI. In- year t2, with~ the influence of a previous year's good price, production should increase substantially to OQ2 and price would drop sharply to OPz. This, presumably, would' force some producers to (temporarily at least) cease production and Price p0 p1 p3 P2 I -------1- -------~--1- ~ 1~ ~------- T -LtJ~' Qo Q1Q3 Q2 Quantit)' Figure 1. Hypothetical Supply and Demand Curves

others to heavily'curtail it. Thus, in year t3, productiom would be less, OQ3, and price would increase to OP3.' ° Any effort to assign numbers to the prices and production levels in Figure 1 is obviously open, to criticism. However, the following suggested patterm may shed some light on the type of price variability which would be associated with such a model for burley leaf: Production Demand Price Arc Demand Elasticity (mil. lbs.) (cents per lb. Qo = 530 Po = 70 .70 Q, = 610 Pt = 59 .28 Q2 = 740 P2 = 43 .27 Q3 = 650 P3 = 52 Disposition of Government Loan Stocks. In thee above example, units) exceeds supply elasticity, and such would seem to be feasible in the length stable cobweb pattern, of course, occurs only when demand elasticity (in absolute which is consistent with our earlier discussion under the long-run section. The I ' Note that this analysis eventually leads to a reasonably stable equilibrium price other reason, to dispose of considerable portions of existing loan stocks losses it might become necessary, because of the tobacco's age or some lessened by a loan stock disposition policy designed to minimize CCC (OP3) which, in year t2, would give rise to somewhat more production and a somewhat lower price, etc. Even though price variability could be OQ3) by disposal of some loan stocks. This would lead to a lower price altered by such a policy. In year ti, OQt could be increased (to, say, Consider how' the analysis accompanying Figµre 1 could be loan-stocks-pricing policy designed to minimize CCC losses. alter the basic cobweb pattern of Figure 1. One might still expect considerable price variability, but variability could be reduced by a program termination. Such a disposition policy would not substantively selling of sizeable amounts of leaf during years immediately following losses on these loan stocks, and this might be accomplished by selective Presumably the grower cooperatives would prefer to minimize higher prices in years when free market production is lower. woul& be much less harmful (thus much more politically feasible) at prices are lowered. This suggests that disposition of CCC' loan stocks lower demand elasticities are associated with lower prices and this is consistent with what we might expect. That is, tobacco dealers and manufacturers would expand purchases less than proportionately as of run we have described. i I

41 in a short time (say, two or three years). If this were to happen, them the average (or long-run) price level could be sharply depressed for those initial years. Imperfect Competition Among Buyers. Many tobacco producers have long suspected that market price supports prevent the buying firms from exercising the market power which is theirs by virtue of their fewness. It is felt that, im the absence of supports, buyers would artificially depress prices. Imperfect competition among buyers might take a number of forms. First, the firms might engage in outright collusion and act as a unit. In the short run, especially in a single marketing season when supply is more fixed, such concerted action might well lead to sub- stantially lower prices than would competition among buyers.' S If however, the long-run tobacco supply function is very elastic, as our earlier analysis leads us to believe, persistence in such tactics would' result in output levels lower than those desired by the buyers. Such tactics would probably be unprofitable except' in isolated cases. They might, however, result in an increase in short run price variability. On the other hand, buying firms might follbw a price leader, perhaps different leaders for different kinds of tobacco. The results of such action probably would not differ significantly from the case of outright collusion. The market has generated some data which tend to refute the hypothesis that buyers would be able to collude and reduce prices in the absence of price supports. This hypothesis implies that market prices of tobacco would never rise above the support prices. As a matter of fact, the seasonal average prices for both burley and flue types have been substantially above the average support level im a number of instances. For individual government grades the differentials have at times been spectacular. Declining Land Values Restriction of burley and flue-cured production rights combined with supmort nrices eradualiv have eiven~ rise to higher tobacco orices. e te "This assumes that such aclion would not be challenged by the Justice ~ 1h Department's Antitrust Division.

42 the value of which has generally been capitalized into land prices.' Maier, et Ql. I ' employed regression models to estimate that one acre of flue-cured allotment was worth $2500 in 1957 in certain eastern North Carolina counties;, values in Piedmont North Carolina and Virginia counties were estimated to be around $1300 per acre. Seagraves and Manning analyzed why flue-cured allotment values have gradually increased over time." Thus, there is no reason to suspect that cunent flue-cured allotment values are any less (likely they are considerably higher). The same might be concluded for burley, the 1967 value of which was estimated (using regression techniques) to be $6015 per acre by Hoskins and Shuffett.' 9 Program abolishment would completely dissolve allotment values. The relevant question, however, is to what' extent would farmlan& values be lowered. Percentage estimates of the possible reductions in farmland values for North Carolina, Kentucky and selected counties in each state are presented in~Tables I and 2.20 A gross interpretation of these data is to conclude that program elimination ~ would decrease North Carolina's farmland value by 26.4 per cent-from aroun& 3.6 billion dollars-and, similarly, decrease Ken- tucky's farmland value 20.8 per cent-from around 2.9 billion dollars to 2.3 billion dollars. It is our opinion that these percentages may be on the low or conservative side. Yet, they should be used with caution. First, they may vary over time. In addition, they may not necessarily represent independent contributions to land values.2 t "The institution of lease-and-transfer of allotment programs has not separated land values from allotment values. Transfer programs, now operating, allow lease only withiro counties on a yearly basis. So, the basic value still lies within the lessor's land! This is discussed more fully by Dale M. Hoover in Lease and Transfer of Flue-Cured Tobacco Marketing Quota Among Farms for tlre 1966 and 1967 Crop Year. r' F. H. Maier, et aL, op.cit. "J. A. Sragraves and R. C. Manning, Flue-Cured Tobacco Allotment Value and Uncertainty 1934-1962, Economic Research Report No. 2, Department of Economics North Carolina State University, Raleigh, 1967. "D. Al. Shuffett and 1. Hoskins, op.cit. "Varying county rates for allotment values ware strictly a matter of judgment on our part, based on work by Hoover, op:cit., and Shuffett and Hoskins, op.cir. °1Multiple regression models employed by Maier, et aL, op.cit. and by SFiuffett and Hoskins, op.eit., atr always subject to spccification bias, i.e., upward bias of

43 prices.' 6 e acre of rn North Virginia raves and gradually r current siderably ( value of S per acre t values. farmland ctions in unties in program 26.4 per ise Ken, lollars to ty be ocaution. cessarily separated ow lease ithin the Transfer ind 196 ~lue v,rd' ment of ment on cir. Shuffett dbiasof Table 1. Estimates of Burley Tobacco Allotment Value as a Per- centage of Total Farmland Value, State of Kentucky and Selected Counties Area or County Total farmland valuea Tobacco allotmen: value as a percentage of total farmland val-je° ($1,000) (Percent). Kontucky 2,954,136 20.8 6racken, Mason and Robertson 79,613 23.5 Bourbon 76,497 50.9 Iladison 58,035 30.3' Fleming and Lcw•i's 104,478 18•3 Barren and Metcalfe 97,292 25.4 Green and Taylor 65,673 18.2 Adair and Casey 75,111 15.8 Daviess and Hancoek 114,864 10.2' aFor the state, Bourbon, and Madison Counties these values were cal- tulated from,farmliand value and acreage data contained in the 1954 lhlitcd States Census of Agriculture, Vol. 1, Part 30L Aentuckr.. ror other counties, farmland value data were obtained from the F:entuck+' Department' of Revenue and represent 196B'valvesB bT!oLacco allotment (burley) was valued at 53,000 per acre for the state and all counties except Bourbon and Madison, where values of $6,000 and $5,000, respectively, were used. For the state, Bour»n, and Madison Counties allotment data are for 196alcorresponding to the 1964 farmland census data. For other counties the data are for 1968. Obviously, land value decreases of anywhere near this magnitude would introduce chaos into the financial position of many farm owners-especially those with large farmland mortgage debts. Moreover, adverse effects would not stop at the farm gate. In many rural counties the property tax base could be severely eroded. Many land mortgage holders would; at the least, find themselves holding some "paper" of uncertain, recovery value. Finally, such~ adverse effects woul& most certainly spill over into the nonfarm economic sectors of these two the tobacco allotment value variable due to omissiom of some other relevant mariable. !t is doubtful that this happened in thesestudies. However, there.ras a large degree of correlation between the tobacco allotment value variablb and certain other vanables;,this coul& have distorted the allbtment value estimates to some extent. R l I -t

k 44 states and surrounding regions. An in-depth analysis (quantification) of each of these effects is beyond the purview of this paper. More informa- tion on these effects could be provided by an exhaustive (but costly from the research standpoint) economic-sector or input-output study. Perhaps existing input-output models for each tobacco producing state could be adapted by further delineating the agriculturall sector into tobacco, other-crop and livestock subsectors. Other Long-Run Effects There are a number of other agricult'ural variables which could change significantly in the event~ of program elimination. In this section we will comment briefly on changes for each of the following; tech- nology in production (especially the possibilities of mechanization elr masse), size(s) of tobacco operating units along, with dispersion of Table 2. Estimates of Flue-Cured Allotment Value as a Percentage of Total Farmland Value, State of North Carolina and Selected Counties Area or County Total farmland valuca Tobacco allotment value as a percentage of totaL farmland valuel' (51,000) (Percent) North Carolinac 3,624,194 26.4 Columbus 83,722 53.1 Wilson 91,916 50.9 Stokes 38,528 48.4 Warren 23,099 59.2 Wake 113,650 31.7 Durham 20,916 10,5 Randolph 41,OS5 6.5 aCalculated from farmland value and acreage data contained in the 190. United States Census of Agriculture, Vol. 11, Part 26, North Carolina. bTobacco allotment values were calculated by multiplying pounds of tobacco allotment (per area) by an allotment value per pound. Data on pounds of tobaccolallotncnt were obtained from the ASCS lnnual RC- pHt, \ortii Carolina, 1967, USDA. Data on allotment sale values per pound were a u, tcd from lease values determined b> Iloovcr b;' di'ciding his estirates of average Lease values per pound by a perpetuity factor of 12.5. See Da1c tt. Hoover, o,.eit. elncludcs both burley and flue-cured allotment. P h ] 9 t If 1 D

45 f ' acreage among individual farms, farm~income and resource adjustments, and possible production relocation. For the most part, empirical studies have not dealt directly with possible, expected changes in these variables. Consequently, what we have to say will be primarily our own initial hypotheses about the direction of possible changes. Technological Changes. No empirical studies are available which deal with this problemL It is our opinion that program elimination would not induce many perceptible changes in production technology, at least not initially. Of course, short-run profit incentives for individual ~ producers would be switched from maximizing returns to allotment n (pounds or acres) toward maximizing returns from the bundle of fixed i resources (land's resident labor, and investment capital). This implies ~ certain changes in existing, input ratios-probably toward~ less intensive f production techniques. Along this line, it seems reasonable to expect F increased incentive for adoption of mechanical harvesting and market preparatiom systems as they are perfected by engineers and become ~ economically feasible. Mechanization feasibility may be enhanced by shifts or relocations in tobacco producing areas (which we subsequently discuss). Size of Tobacco Operating Units. At least three factors appear to perceptibly influence the size(s) of individual production units: 1) potential cost economies of size, 2) the ease of acreage consolidation affected, in turn, by physical factors such as land topography and institutional factors such as production licenses (allotments), and 3) the sheer need for larger family disposable income affected. in turn, by a number of factors including tobacco market prices. The first two factors could come heavily into play if the program is terminated. One may argue that cost economies might be realized even with current control programs. Still, it should be realized that such economies, even. if available, cannot be realized unless barriers for entry or acreage consolidation are at least relaxed. Each of these two factors is discussed briefly and separately; the reader should realize that they act together in determining changes in sizes of operating units. Although there are no direct studies on economies of size. most surface evidence indicates that under presently available technology, the size of a burley operation-beyond~ enough acreage to accommodate one small curing barn-does not have any perceptible effect upon production cost. There may be some economies for larger producers 30-498: 0 - 78 -.4

I 46 who can buy chemicals and fertilizer in larger quantities; still, these savings are very small when expressed on an output (poundage) basis. This situation could change if mechanical harvesting and market- presentation systems, currently under development by engineers, became commereially feasible. Such systems may be adopted, it should be emphasized, for reasons other than achieving costs economies, e.g., ease of obtaining a labor crew. Consequently, burley producers may eventually, over time, adopt en masse such technology as mechanical harvesters, two-tiered curing barns and stripping machines, even in the face of what appears to be slightly larger unit costs. . Flue•cured producers, as opposed to burley, have for the past ten years steadily been adopting a number of mechanical harvesting and curing systems. Splinter reported on engineering developments in these systems and Bradford' reported that certain of these systems (viz., automatic stringing machines) offer possibilities for cost economies up to a capacity of 15 acres or so.22 These latter findings were corrobor, ated and extended into a much more exhaustive analysis conducted by Davis and Chappell.Z 3 Turning now to the problem of ease of allotment consolidation, there seems little reason to doubt that acreage allotments, strictly tied to the land, have deterred consolidation of burley acreage.2 ° The magnitude of this deterrence has not been estimated, but it is known that there has beemsome consolidation of management control through traditional share-rental arrangements. Recent work by Hoff has shown that in 1969 the average size of a tobacco management operation in Bourbon County, Kentucky was 5.47 acres (of tobacco), contrasted to °=See W: E. Splinter, "Engineering Developments in Harvesting and blarkeV Preparation Systems" in Tobacco Mechanization and Marketing. Agricultural Policy Series 29 N.C: State University, Raleigh, 1968, pp. 15-26, and G. L.. Bradford. "Effects of Changing Wages on the Profitability of Harvesting and Market Preparation Systems and on the Structure of Tobacco Farms," in Tobaccn Mechanization and Marketing„ 1968, pp. 1-14. ?'Bob Davis and J. S. Chappell, stlterttatire Tobacco Harvesting and Curing Systems for tlreNorth Carolina Coastal Plainr, Economic Information Report No. 12, Departmenrof Economics„N. C. Statc Universit'y„Raleigh, 1969: "Burley allotments prior to 1971, could be transferred among farms within the same county if the tracts of land has a common owner and if other provisions, such as cropland percentages, were met. Also, it is possible to transfer among owners if the lessor cash rents the entire farm of the lessee. This latter pro%ision has always been used to some extent. I I 1

ese ket- ers, ul& •g•1 ay ical the 47 an average allotment size of only 3.43 acres.' 5 In Metcalfe County, the Hoff survey showed the average size of a tobacco management opera- tion to be 2.04 acres, compared to an average allotment of only 1.37 acres. Apparently the incentive for consolidatiom does exist. Program elimination, it seems, might hasten the consolidation process-the extent of such change being something of a guess. The flue-cured lease and transfer program has been in constant operation since 1962. Since that year the amount of leasing activity has grown steadily from around three per cent of total acreage in 1962 to over 15 per cent in recent years? 6 Thus, there are definite indications that this program has helped enlarge the average size of flue-cured tobacco management unit. Hence, there is some question if program elimination, would contribute to muchi additional consolidation of flue- cured acreage per management unit. As subsequently discussed, there may be reason to expect geographic shifts in production, but this could take place without increasing the average size of flue-cured tobacco operating units. Farm Income and Resource Adjustments. In general, farm income of current tobacco produc~.ng areas would be lowered significantly by changing to a free market. One might contend, and'reasonablyso, that the program has created incentives for inefficient uses of existing farm resources. Even so, for the areas now producing tobacco, returns from "monopoly rights" to tobacco production probably have much more than offset inefficiencies attributable to the program. In the case of burley, this contention was corroborated in a regional study by Grise, et al,27 Their, rresults indicated that under a free market; net returns to land, resident labor and management for farms in current producing areas would decrease around 13 per cent, i.e., after taking into account alternative uses of land and labor resources. A study by Thompson and Davie28 showed income losses would be considerably less for larger farm operations in the western "See Chapter t1 of this book. "Dale M, Hoover, op:cit. "V. N. Grise, et at., op.cit. =a J. F. Thompson and J. R. Davie, Changing Burley Tobacco Allotrnents and Optrrmum Farm Programs in the Western Pennyroyal Area of Kentucky; Bulletin 707,, University of Kentucky Agricultural Experiment Station, Lexington, 1967.

48 Pennyroyal area of Kentucky; using linear programming analysis they~ ~ estimated the percentage drop to be only 3.7 per cent on~ a synthetic 450-acre farm, contrasted to a 15.9 per cent drop on the 125-acre farm ` in the same area. Unpublished work of the same nature by Collins, but ;, for a different geographic area (viz., farms located in the hills of Kentucky's Bluegrass area), indicates that farm income decline would be very pronounced. Thus, burley farm income declines would be expected to vary considerably among geographic areas, implying, varying resource adjustments would be needed:29 In the case of flue-cured tobacco, we do not know of any empiri- cal estimates of the degree of income loss which could occur as a result of program abolition. Our guess is that the reduction would be rather substantial. During the 1961-65 period, tobacco sales revenues contributed over 46 per cent of Norff Carolina's total cash receipts from all farm commodities, compared to around 41 per cent in Ken- tucky.30 In recent years both percentages have tended to decline slightly. However, it is extremely hard to reason that there exists any immediate alternative farm resource uses which would allow net farm income to recover rapidly in either state, or even in several other southern states heavily involved in tobacco production. Production Relocation. Employing a spatial eqµilibrium linear programming model, Grise concluded' that burley tobacco would bee produced in alli (current) producing regions even if auction-level prices were as low as 42 cents.31 Their analysis also showed that at this equilibrium price, the relative distribution of acreage would not be markedly different from the pattern which now exists.32 Even though they did not consider geographic areas of the U.S. cu:.rently not pro- ' !n geographic areas where few alternative profitable on-farm~ activities exist, such as the Bluegrass Hills, off-farm employment could be the only realistic income substitution possibility. s'blost of the 46 per cent contribution to total cash receipts was from flue-cured sales while in Kentucky the 41 per cent contribution was from~ burley sales. Figurcs taken from Unitcd States Department of Agriculture, Consumer, and Markeung Service. Annual Reports on Tobacco Statistics, Statistical Bulletins no. 356 and 435, Washington, 1964 and, 1968. s' V: N. Grise, et al.,,op.cit: "Their results did indicate some relative shifts away from Kentucky's Bluegrass areas to south-central and, eastern Kentucky and the valleys of eastern Tennessee, western Virginia and North Carolina. These changes were not sharp enough to be considered "marked"'

49 ~sis they nthetic re farm ins, but ills of would uld be plying empird- a result e rather evenues receipts in Ken- decline ists any et farm il other ducing burley, it seems extremely doubtful if potential producers in any of these outside areas would frnd~ it feasible to engage in burley production under free-market conditions 33 In general, empirical studies of possible shifts in geograplucal distribution in flue-cured production have been conducted only on an indirect basis. Bradford and' Toussaint34, in connection with studying the effects of across-county allotment transfer, concluded that pro- ducers in eastern North Carolina and the coastal plains of South Carolina generally reape& higher profits from tobacco production than producers in the Piedmont areas of North Carolina. Based on this an3lysis they predicted a shift in acreage to these coastal areas if across-county transfer was legalized. Subsequent work conducted by Hoover35 and by Efstratoglou an& Hoover36 generally corroborated this conclusion.37 However, none of these studies provided an empiri- cal estimate of the magnitude of location shifts which might be expected4f the tobacco program were abolished.38 Conclusions Now that burley tobacco producers have approved a new program of poundage quotas and transferable allotments the chances of sudden program abolition appear to have lessened considerably. Still', in future years old crises may resurface andJor new crises may emerge which could lead to abrupt program abolition by the Congress or by pro- ''Produeers in these outside areas simply would not be able to compete efficiently given their, inexperience with the technology, their lack of favorable weather and soil conditions and, most important, their lack of a market. "'G. L. Bradford and W. D. Toussaint, Economic Effects of Transferable Tobacco Allotments, Agricultural Economics Information Series No. 89, Department of Economics, N.C. State University, Raleigh„1962. " ' Dale M. Hoover, op.cit. 36 Sophia Efstratoglou and Dale M. Hoover, Variability in Rerital Rates Paid in the Flue-Cured Tobacco Rental dlarkets in Selected North Cvrolina Counties, Economic Research Report No. 12, Department of Economics, N.C. State Univer- tity, Raleigh,19T0. "Simil2r to burley, perhaps even more so, there is little reason (not.vithstanding our lack of empirical studies) to suspect that potential producers in geographic areas outside current flue-cured producing areas would find it feasible to engage in produotion under free-market conditions. "17tis„of course, was not an objective of these studies.

50! ducers. ln this paper we have presented some ideas about the economic effects of a sudden program termination. In~general, we concluded that burley and flue-cured market prices would decrease by an average equal to the annual allotment value-currently, this would be around 20 to 25 cents per pound. Secondly, farmland values woul& be expected to drop rather sharply-the exact magnitude currently was estimated to be tion and upon farm income and resource-utilization changes. program termination upon production relocation, allotment consolida- North Carolina's farmland value. Finally, we discussed the effects of around 20 per cent of Kentucky's farniland value and 26 per cent of f~~

51 nomic d that equal to 25 BIBLIOGRAPHY Bradford4 G. L. "Effects of Changing Wages on the Profitabiiity of Harvesting and Market Preparation Systems and on the Structure of ;o drop to be :ent of Farms," in Tobacco Mechanization and Marketing. Agiicultural Policy Institute Series 29, North Carolina State University, Raleigh, 1968. ects of i 'solida• Bradford, G. L. and W. D. Toussaint. Economic Effects of Transferable Tobacco Allotments. Agricultural Economics Information Series Number 89, Department of Economics, North Carolina State Univer- sity, Raleighs 1962. Brooks, R. Charles and J. C. Williamson, Jr. Flue-Cured Tobacco Programs, 1933-1958. Agriculthiral Economics Information Series Number 66, Department of Economics, Nbrth~Carolina State Univer- sity, Raleigh, 1958. Davis, Bob an6 J. S. Chappell. Alternative Tobacco Harvesting and Ciering Systems for the North Carolina Coastal Plains. Economics Information Report Number 12, Department of Economics, North Carolina State University, Raleigh, 1969. Efstratoglou, Sophia and Dale M. Hoover. Variability in Rental Rates Paid in the Flue-Cured Tobacco Rental Markets in Selected North Caroli,za Counties. Economics Research Report Number 12, Depart- ment of Economics, North Carolina State University, Raleigh, 1970. Grise, V. N., J. F. Thompson and F. E. Justus, Jr. An Analysis of the Effect of Selected Economic Variables on the Optimum Location of Burley Tobacco Production Within the Burley Belt. Research Report Number 8, Department of Agricultural Economics, University of Kentueky„Lexington,1971.. Hartman, L. M. and G. S. Tolley. Effects of Federal Acreage Controls on Costs and Techniques.of Producing Flue-Cured Tobacco. Techni: cal Bulletin Number 146, North Carolina Agricultural Experiment' Station, Raleigh, 1961. M

K 52 Hoover, Dale M. Lease and Transfer of Flue-Cured Tobacco 1lfarketbrg Quota Among Farms for the 1966 and 1967 Crop Year: A Prelimi- nary Report. Economics Information Report Number 6, Department of Economics, North Carolina State University, Raleigh, 1967. Lyon, Herbert LL and Julian L. Simon. "Price Elasticity of the Demand for Cigarettes in the United States." American Journal of Agricul- tural Economics 50: 4, 1968, pp. 888-895. Maier, F. H., J. L. Hedrick and W. L. Gibson, Jr. The Sale Value of Flue-Cured Tobacco Allotments. Technical Bulletin Number 148, Southeast Land Tenure Research Committee, V:P.I., Blacksburg, Virginia, 1969. Seagraves, J. A. "Capitalized Values of Tobacco Allotments and the Rate of Return to Allotment Owners," American Journal of Agricul- tural Economics 51: 2, 1969, pp. 320-335. Seagraves, J. A. and R. C. Manning. Flue-Cured Tobacco Allotment Value and Uncertainty, 1934-1962. Economics Research Report Number 2, Department' of Economics, North Carolina State Univer- sity, Raleigh, 1967. Shuffett, D. M. and Josiah Hoskins. "Capitalization of Burley Tobacco Allotment Rights into Farmland Values." American Journal of Agricultural Economics 51: 2, 1969, pp. 471-474. Splinter, W. E. "Engineering Developments in Harvesting and Market Preparation Systems," im Tobacco Mechanization and Marketing. Agricultural Policy Series 29, North Carolina State University, Raleigh, 1968. Thompsony J. F: and J. R. Davie. Changing Burley Tobacco Allotments and Optimum Farm Programs in the Western Pennyroyal' Area of Kentucky. Bulletin 707, University of Kentucky Agricultural' Experi- ment Station, Lexington, 1967. United States Department of Agriculture. ASCS Annual Report, North Carolina. Raleigh, 1967. Ur Ur U 1ti

53. United States Department of Agriculture, Consumer and Marketing Scrvice. Annual Reports on Tobacco Statistics. Statistical Bulletins Number 356 and 435, Washington, 1964 and 1968. United States Department of Agriculture, Statistical Reporting Service and Kentucky Department of Agriculture (Division of Markets). Annual Reports. l.oui'sville„Kentucky; 1964-1969. United States Department of Commerce, Bureau of the Census. 1964 U.S. Census of Agriculture, Kentucky. Volume 1, Part 30, Washing- ton,1964. United States Department of Commerce, Bureau of the Census. 1964 US. Census of Agriculture, Nortlr Carolina. Volume 1, Part 30, Washington, 1964. Williamson, J. C., Jr. an&W: D. Toussaint. "Parity and Support Prices for Flue-Cured Tobacco," Journal of Farm Economics 43: 2, 1961, Pp~ 13-26.